Copyright © 2007 John Wiley & Sons, Ltd and ERP Environment * Correspondence to: Professor David Paton, Ph.D., Nottingham University, Business School, Jubilee Campus, Wollaton Road, Nottingham NG8 1BB, UK. E-mail: David.Paton@nottingham.ac.uk Business Strategy and the Environment Bus. Strat. Env. 18, 397–413 (2009) Published online 10 December 2007 in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/bse.608 The Impact of Financial Performance on Environmental Policy: Does Firm Life Cycle Matter? Khaled Elsayed 1 and David Paton 2 * 1 Ain Shams University, Business Administration Department, Cairo, Egypt 2 Nottingham University, Business School, Nottingham, UK ABSTRACT Existing literature has provided inconclusive evidence regarding the impact of financial performance on firm policy relating to environmental issues. In this paper, we propose that the influence of corporate financial performance on corporate environmental policy is unlikely to be monotonic but, rather, will vary with firm life cycle. We test this hypothesis by the application of static and dynamic techniques on panel data from UK companies. The results provide support for our hypotheses that financial performance has the strongest impact on environmental policy in the maturity stage of the firm life cycle and the weakest impact in the rapid growth stage. Copyright © 2007 John Wiley & Sons, Ltd and ERP Environment. Received 4 September 2007; revised 23 October 2007; accepted 24 October 2007 Keywords: environmental commitment; environmental strategy; firm life cycle; economic performance; corporate social responsibility Introduction I NCREASING PRESSURE ON FIRMS TO STICK TO ETHICAL CONDUCT IN PRACTICING THEIR ACTIVITIES HAS TRIGGERED a stream of literature attempting to identify firm-level characteristics affecting corporate environmental policy and, in particular, managers’ decisions to invest in social–environmentally responsible activities. This litera- ture has suggested several variables to be relevant, including legislation, commitment of senior managers, firm structure and strategy, changes in process or product design, financial interest groups and organizational capabilities (see, for example, Petulla, 1987; Hunt and Auster, 1990; Hart, 1995; Nehrt, 1996; Hart and Ahuja, 1996; Rugman and Verbeke, 1998; Baylis et al., 1998; Pickman, 1998; King, 2000). A key variable that has attracted much attention is corporate financial performance. Authors such as Preston and O’Bannon (1997) and Waddock and Graves (1997) have argued that the presence of ‘slack resources’ (or ‘available funds’) is key to determining whether or not managers decide to engage in social–environmental programs. Although this hypothesis is intuitively attractive, empirical studies of the impact of corporate financial perfor- mance on its environmental policy have yielded inconsistent results. For instance, Hammond and Slocum (1996) and Waddock and Graves (1997) find that prior financial performance has a significantly positive impact on sub- sequent social–environmental performance even after controlling for firm size and industry type, a conclusion supported by McGuire et al. (1988, 1990). Furthermore, Christie et al. (1995) and Zhuang and Synodinos (1997)